Valuation Using the Gordon Growth Model (1).
In Example 2-3, you estimated a required rate of return on J.C. Penney (NYSE:JCP) stock as 8.8 percent using the CAPM. On examination, you believe stable growth at a rate of 6 percent is a good description of the long-term prospects of JCP. JCP's current dividend is $0.50.
1. Calculate the Gordon growth model value for JCP stock.
2. The current market price of JCP stock is $25. Using your answer to Question 1, state whether JCP stock is fairly valued, undervalued, or overvalued.